Khyber Pakhtunkhwa (KP) Finance Minster Sirajul Haq surprised observers on Saturday with a budget focused on education and welfare. The Rs 404.85 billion budget set aside Rs 139.8 billion for the province’s Annual Development Programme (ADP), up 18 percent from last year’s Rs 118 billion. The remaining Rs 265 billion is for current expenditure. Development spending on education is at Rs 29.8 billion, up 29 percent. Rs 111 billion has been allocated for education overall, including construction of 660 primary schools. Sirajul Haq said the province would not incur a deficit despite increased spending, with Rs 227.120 billion provided from federal taxes, 14.55 percent more than last year. Revenues from hydel power generation, oil and gas exploration, and increased tax receipts were also cited. Interestingly, Rs 1 billion has been earmarked for environmental development, a sector otherwise badly neglected at both the federal and provincial levels. The new element in this budget is the levying of progressive taxes on agriculture, with landholdings of different sizes slated to pay different rates, and progressive property taxes. KP is the first province to introduce such taxes despite (or perhaps because of) not having large landowners like Punjab or Sindh. If enforced, it should help the province meet its ambitious development targets. This shift in KP’s development priorities comes on account of additional focus on rural development that received 62 percent of allocations as against 58 percent the year before. The expenditure on education and increases in the health budget are badly needed relief for the poor, and introducing taxes on incomes that have for long remained outside the tax net was essential. There are of course, pet projects and wasteful expenditure as well, such as Rs 750 million for a Peshawar Mass Transit scheme, which may or may not be successful, and Rs 1 billion allocated for ‘beautifying’ district offices and buildings. The province mandated a 10 percent increase in salaries and pensions in line with the federal budget, though like in other provinces the move was criticised as insufficient. Proposed revenue generation continues to show the faulty thinking widely prevalent of taxing hitherto untaxed social services and businesses using indirect taxes, bringing small businesses like jewellers, tobacco shops, cable operators and marriage halls into the indirect tax net by imposing sales tax between 10 and 16 percent. This will be balanced by lowering the tax on certain minor and major services. The move is bound to impact the middle class. As we have argued in this space, indirect taxation will not remove the discrepancy in tax receipts caused by the undocumented (grey and black) sectors of the economy. While the move should be mandated at a federal level, provincial authorities have to initiate a process of documenting assets and businesses to increase revenue generation rather than indirectly tax already burdened consumers. Some innovative thinking is required, and while KP’s budget is a step in the right direction, there is still a long way to go. *